Lower milk prices, demand taking toll on region’s dairy farmers
Many, struggling to stay afloat, cannot afford to participate in conservation programs
For many dairy farmers in Chesapeake Bay states, the financial screws keep tightening.
While grain farmers can be hurt by disastrous years such as 2018 when water-soaked fields resulted in zero yields for some, they are backed by crop insurance programs that help get them through year-to-year market fluctuations.
But for dairy farmers, a decade of low milk prices brought on by oversupply and falling demand is taking a toll. Some ag lenders and those in the farm real estate business foresee a wave of banks shutting down credit for struggling dairy farmers this fall or winter, expediting a steady several-year stream of farmers leaving the business.
“What I’m seeing out there now is we’re in uncharted waters with the dairy industry because some of these folks aren’t sure where to turn to. Some of these farmers are in survival mode,” said John Mattilio, who sells farms in central Pennsylvania with Farm and Land Realty. “I can walk onto a farm, and I can see the signs and symptoms of financial problems. These guys have a stack of bills on the kitchen table, and they’re trying to figure out which ones to pay this month.”
The face of dairy farms is already changing as proud farmers try to hang on to their land, which has often been in families for generations.
Some are renting out their fields so they can continue to live on the farm. Others are supplementing income by growing goats, produce, tobacco or raw milk and cheese. Some hope that growing hemp will save them. Others are selling timber or equipment to stay afloat, or add repair shops. Some have become truck drivers or have spouses going back to school to become teachers.
And some farmers are buying time by reorganizing under bankruptcy or refinancing, or jumping around between suppliers, maxing out credit for feed for their cows. They skip veterinary care for their animals and don’t buy needed tractor parts or fix the barn roof.
And some are selling their dairy herds and equipment. “There are a number of empty barns around right now,” noted Lowell Fry, vice president at Fulton Bank, the largest ag lender in Pennsylvania and a major lender in Maryland, Delaware and Virginia.
But it’s an awful time to liquidate one’s herd. So many cows are being sold that it’s driven down the value, whether they are sold for meat or milk. The prices are so low that it’s actually cheaper to buy cows or heifers for milk production than raising them on the farm.
Many times, especially with Plain Sects, neighbors band together and buy a few cows each.
Other dairy farmers are shutting down and selling everything. Each weekly issue of Lancaster Farming, a trade newspaper serving Bay states, lists a handful of farm auctions. But many also are sold privately to other farmers or family members.
Last year, Beiler-Campbell Realty, which sells farms in 30 Pennsylvania and northern Maryland counties, did a record $100 million in farm sales. By the end of June this year, their farm sales already totaled $68 million.
Many of the farms are being bought by other area farmers with larger operations instead of being sold to developers.
The Chesapeake Bay watershed is home to 571,000 dairy cows, according to the federal 2017 agricultural census. But that number is down 3% from the 2012 census.
Every Bay state that has significant milk production saw the number of cows decline. About two-thirds of the drop in cow numbers came from Pennsylvania — 20% in Lancaster County alone.
The financial stress on dairy farmers is having a chilling effect on efforts to enlist them for on-the-farm conservation practices. Even with cost-share projects, the farmer usually has to pay for some portion of the improvements.
“Many cost-share programs are reimbursements,” noted Ryan Davis of the Alliance for the Chesapeake Bay. “A producer will likely to have to take out a loan to pay the upfront cost. This may be fine in a normal ag economy, but at this point, many farmers can’t take on the additional debt.”
“In good times, dairy farmers are usually stretched to come up with their contribution, but they do it,” added Lamonte Garber of the Stroud Water Research Center. “With years of low prices for [milk], even modest projects are out of reach unless they’re 100% funded, or nearly so.”
To be sure, the seemingly endless tough times are taking an emotional toll. One agriculture writer in Pennsylvania knew three dairymen in three states who committed suicide in 2018. She knows others whose marriages have shattered.
The low milk prices that have prompted the current downsizing followed a relatively profitable period in the 1990s when many dairy farmers expanded their facilities and herds. Because land values for farmland remained high, farmers were able to borrow against that equity. But now, with millions invested in those expansions, there is no profit to pay off the investments.
Compounding the problem, feed prices in the Northeast are among the highest in the nation, further cutting into the chance for profits.
“These guys have ridden the wave longer than any other segment of agriculture. I think the people in the dairy industry never thought the economy would catch up with them like it has,” Mattilio said.
But it has, and banks, though overall working patiently with their longtime customers, are required to deal with what they call “nonperforming” loans.
Many ag lenders said they now require farmers to draw up monthly budgets and report cash flows more frequently.
That’s a positive thing, according to Mike Peachey, an accountant with Pennsylvania-based Acuity Ag Advisors, who works with dairy farmers. “You have to know what the future’s going to look like, whether you’re digging a hole, treading water or making progress.”
But banks do not want to be in the real estate business. And they fear that a mass exit from farming would drive down farm values and make it difficult to recover their investments.
“Banks will take steps so there is not a mushroom exodus. We get hurt, too, if all farmers sell at once,” said Fulton Bank’s Fry. “I don’t think that we’re going to see a mushroom cloud of this because everybody is working so hard. But we’re not extending credit.”
Added Dale Hershey, an ag lender with Univest Bank & Trust, which serves Pennsylvania, “Anytime you get an oversupply [of milk], sooner or later something had to happen. But, man, this has been a long drawn-out process. This trough has been deeper than we’ve ever seen. It just keeps on lingering and lingering.”
Where will it end?
Some dairy farmers are embracing several months of a slight uptick in milk prices as hope that, just maybe, better times are around the corner.
But few in the financial side of the industry share that optimism.
Fry sees reductions in the numbers of dairy farms in Bay states continuing to dwindle. “I think the industry will figure out how it will work,” he said. “They will find a way to increase cash flow to a point that they can manage that and move on.”
Mattilio agreed. “They’re going to have to be creative. They’re hard-working and creative. But some of them will have to realize what we did no longer makes sense,” he said.
Mattilio, who grew up on a dairy farm and spent 14 years as an ag lender, predicts two trends. In one, dairy farms will be bought by larger operations, meaning fewer but larger farms of 500 cows or more. Existing farms that survive will be smaller ones that can be run by a family without outside labor. That’s especially the case with Plain Sect farms.
“What we know to be true and reasonable in the dairy industry is gone,” he said. “The situation is dire and folks who think it is going to come back around… These dairy farmers are not used to failing. They’re not used to not being able to pay the bills. I don’t know where it’s going to take us, but it’s going to be different.”